Using a conventional loan when investing in real estate may not be the best option for you every time. Yes, conventional loans have supported many kinds of real estate investments, but acquiring a conventional real estate loan can be very challenging. There are a lot of criteria investors must satisfy for a traditional lending institution to provide them with loans.
So, does this mean that loanees who fail to qualify for a traditional loan should refrain from investing in the real estate market? Not at all. In fact, many investors do not even rely on conventional loans to support their investments.
But what do investors do when they need quick financing at affordable rates? The answer is hard money loans.
What are hard money loans?
Hard money loans are investment property loans provided by individual investors and companies who lend money to investors, like Asset Based Lending. The asset being bought often serves as collateral, reducing the risk for both the lender and the loanee.
Hard money loans are great for quick home financing where investors buy rundown homes, renovate them, then sell them at a profit.
Hard money loans are primarily short-term loans, and they often last between 1 and 3 years since their interest rates are often higher than traditional financing options like mortgages.
If you think you might require a hard money loan, here are three significant benefits you can expect.
1. Quick processing times
On average, traditional lenders take about 28 days to process a loan. This time is too long for investors in real estate, especially in an industry with so many players and where property values fluctuate every week.
In those 30 days, an investor could get a hard money loan, buy the property, and kickstart renovations so they can sell the place and refinance the loan they’d taken initially. As such, hard money loans have become a very attractive alternative to bank loans.
2. High chances of approval
One of the most significant challenges real estate investors struggle with today is being approved for a loan from traditional lenders like banks and government agencies. These lenders often consider the applicant’s credit status and annual income to decide whether they will provide the loan.
In some cases, the bank doesn’t provide the full loan amount, leaving the loanee with little choice but to look for yet another financier.
However, hard money lenders don’t consider the investor’s credit or their income. Although they will keep the property as collateral, the main requirement is that the loan amount is equivalent to the property value being bought.
3. More flexible payment terms
Since private lenders provide hard money loans, you have more room to negotiate the long terms. You may even customize the repayment plan to suit your financial status. This makes hard money loans very convenient, especially for someone who’s just starting out in the business.
The bottom line
As an investor, you might have limited options with very little time to access the financing you need to buy a property. A hard money loan can be an ideal fit since it doesn’t come with any of the red tapes that come with bank financing.
If you do get a hard money lender, try and avoid making a hasty decision. Make sure you evaluate their terms, fees, and interest rates so you can make a wise choice.
Story by Brad Bernanke
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